CEO Pay Defies the Laws of Gravity

Remember that saying "what goes up must come down"? Oddly enough, CEO pay doesn't appear to be subject to the same laws of physics that govern the rest of the rational world.

In fiscal 2010, total realized compensation of CEOs in the S&P 500 rose by a median 36.5%. In addition to some of the usual outrageous factors accompanying high levels of CEO compensation, note that some of the CEOs on the top of the heap in 2010 took the money and ran.

A good year for CEOs
GMI, the leading independent provider of corporate governance and ESG ratings and research, has released its ninth annual CEO Pay Survey for 2011. Beyond the 36.5% increase in the surveyed companies' chief executives' pay, extra perks awarded to S&P 500 leaders rose 11% on a year-over-year basis in 2010.

Here's a worthwhile tidbit for shareholders to ponder: Of the 10 highest-paid CEOs of 2010, four were actually retired or terminated chief executives who received golden exit packages. So much for pay that's commensurate with performance; these executives enjoyed a heck of a lucrative year even though they won't offer these companies or their shareholders anything in the way of future performance.

Who's who, and why?
The health-care providers and services category produced the executives in the top two slots. McKesson (NYS: MCK) CEO John Hammergren and Omnicare (NYS: OCR) CEO Joel Gemunder both banked staggering sums of $145 million and $98 million, respectively.

Hammergren's No. 1 slot should give investors pause. Hammergren's base salary of $1.6 million is not tied to performance; neither are his retirement benefits, which increased by $13.5 million on a year-over-year basis. Should Hammergren's tenure at McKesson come to a close, his severance payout would add up to an eye-popping $469 million, according to the survey.

Health insurer Aetna's (NYS: AET) CEO compensation also made the top 10 list at No. 9, with a payout of nearly $58 million. However, GMI notes that this princely sum was awarded to former CEO Ronald Williams, who retired in April 2010. In the four years that Williams headed up Aetna, the stock price declined by 30%.

It's worthwhile to note that General Growth Properties' (NYS: GGP) Chief Executive Adam Metz's $66.7 million compensation put him at No. 6 on the list; General Growth Properties spent most of 2010 in bankruptcy, but at least somebody did well, right? Metz, who only presided over General Growth Properties for two years, received a $46 million cash bonus in 2010; 48 employees of the real estate investment trust received "bonuses to cover what may have otherwise been awarded if the company was not in bankruptcy."

TRW Automotive Holdings' (NYS: TRW) CEO John Plant received two apparently random bonuses in 2010. A $4.5 million bonus included 50% tied to amorphous "additional factors," and he also received a $2.5 million discretionary retention bonus.

Ralph Lauren's (NYS: RL) Ralph Lauren received the maximum allowable bonus of $19.5 million in 2010, and given the lack of actual metrics to explain what the corporate performance and goals actually are, shareholders might be tempted to assume the bonus is just because he's, you know, Ralph Lauren.

Turning the rising tide in 2012
This increase in CEO pay at least partially relates to the stock market's performance in 2010, but that isn't always particularly sound reasoning. Just because a lot of traders with the attention spans of sand fleas bid up stocks willy-nilly doesn't correlate to true long-term corporate performance at specific companies. The market isn't sometimes called "bipolar" for nothing; it's the very long haul that usually reflects the reality of companies' operational strength through investment returns.

GMI pointed out that the Russell 3000 index did increase by 17% in 2010, in contrast to 2011, which has been a much tougher year for stocks. However, suffice it to say that chief executives always seem to come out way ahead of everybody else (namely, investors and workers) financially; CEO pay among those Russell 3000 companies increased 27% in 2010.

Fortunately for us shareholders, we have tools at our disposal to try to get the message across that CEO pay disconnects are no longer OK. We can use our proxy ballots to vote against companies' CEO pay policies, and also withhold votes from the compensation committees' directors who craft outrageous pay (and pen employment agreements that ensure ample pay for failure through golden parachutes). Increasing moves to ensure proxy access pose the threat of replacing dysfunctional directors, too.

In many cases, the ever-rising tide of CEO pay disconnected from true performance should result in rising shareholder ire. The 2012 proxy season will be here before we know it; let's get the message across that CEO pay that's disconnected from performance (or reason) is no longer business as usual.  

Check back at Fool.com every Wednesday and Friday for Alyce Lomax's columns on environmental, social, and governance issues.

At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned. Motley Fool newsletter services have recommended buying shares of McKesson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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